Direct answer
Free margin is the amount of account buffer available after reserving margin for your currently open positions. In practice, it helps you judge whether your account has “room” to absorb adverse price movements before the platform’s margin rules tighten.
Beginners often mix up two different ideas: (1) free margin as a calculated value shown by a platform, and (2) future ability to trade (which depends on many changing conditions). A correct mental model is to treat free margin as an updating number derived from your account equity minus the margin already tied up.
Mechanism and definition
A common simplified relationship is:
- Free margin ≈ Account equity − Used margin
To understand what drives it, separate the inputs into stable mechanics and variable conditions:
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Account equity (the “net value” of the account) Equity typically reflects your starting balance plus realized and unrealized profit and loss from open positions. The unrealized part depends on current market prices and your position details.
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Used margin (the margin reserved by open positions) Used margin depends on position size, leverage settings, and the margin model used by the provider.
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Free margin (the buffer) Free margin changes whenever equity changes (for example, when unrealized profit/loss changes) and whenever used margin changes (for example, when you open or close positions, or when provider rules change how margin is computed).
A fully stated example (assumptions included)
Assume a hypothetical account where:
- Account equity is €1,200.
- Used margin is €500.
- Therefore, free margin is €700 (using the simplified equation above).
If unrealized losses move equity down to €900 while used margin stays at €500, free margin becomes €400. If equity falls further and free margin approaches zero, you are closer to margin constraints.
This example is purely arithmetic. Real platforms may display values using provider-specific definitions, rounding, or margin rules, so you should confirm the exact formula your platform uses.
Evidence via realistic scenarios (and one material failure mode)
Scenario: adverse movement with unchanged positions
You hold open positions. Your free margin is a snapshot derived from equity and used margin. As price moves against you, unrealized losses reduce equity, which reduces free margin even if your used margin stays the same.
Possible consequence (failure mode): when free margin becomes too low, the provider may restrict new activity, require additional funds, or close positions automatically. The precise trigger and behavior are not universal; they depend on the provider’s margin policy and risk controls.
Scenario: new position increases used margin
When you open an additional position, used margin typically increases. Even if equity is unchanged at the moment of opening, free margin can fall because more margin is reserved.
Why “stable mechanics” still don’t guarantee stability
Even with correct arithmetic, free margin can move quickly because equity can change rapidly with market prices. Also, costs and execution quality can affect your account value in ways that change equity.
Limitations and risks
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Provider-specific definitions and calculations Different platforms can compute “equity,” “used margin,” and “free margin” with different conventions (for example, treatment of swaps/financing, floating P&L timing, and margin model assumptions). Because the displayed number is provider-defined, beginners should verify definitions in the platform’s documentation.
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No single threshold is universally “safe” A high free margin at one time does not imply safety later. Outcomes depend on changing market conditions and the provider’s rules, and historical relationships do not guarantee future results.
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Rounding, latency, and execution effects Values can update with delays, and order execution may differ from expected levels. These effects can change the path by which free margin approaches constrained territory.
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Category limitation: free margin alone is not a complete risk measure Free margin is one view of buffer, but it does not fully capture how concentration, position volatility, or event-driven price gaps may affect your account.
Verification and next question to check
To independently verify facts about free margin, focus on what your platform explicitly defines:
- The exact relationship between equity, used margin, and free margin.
- The provider’s stated behavior when free margin is low (for example, margin calls or automatic actions).
- Any assumptions or special cases in their margin calculation (margin model, leverage usage, and treatment of costs).